Financial Management

Financial management entails planning for the future of a person or a business

enterprise to ensure a positive cash flow. It includes the administration and

maintenance of financial assets. Besides, financial management covers the process of
identifying and managing risks.

The primary concern of financial management is the assessment rather than the
techniques of financial quantification. A financial manager looks at the available data to
judge the performance of enterprises. Managerial finance is an interdisciplinary
approach that borrows from both managerial accounting and corporate finance.

Some experts refer to financial management as the science of money management.

The primary usage of this term is in the world of financing business activities. However,
financial management is important at all levels of human existence because every entity
needs to look after its finances.

Financial Management: Levels

Broadly speaking, the process of financial management takes place at two levels. At the
individual level, financial management involves tailoring expenses according to the
financial resources of an individual. Individuals with surplus cash or access to funding
invest their money to make up for the impact of taxation and inflation. Else, they spend it
on discretionary items. They need to be able to take the financial decisions that are
intended to benefit them in the long run and help them achieve their financial goals.

From an organizational point of view, the process of financial management is

associated with financial planning and financial control. Financial planning seeks to
quantify various financial resources available and plan the size and timing of
 expenditures. Financial control refers to monitoring cash flow. Inflow is the amount of
money coming into a particular company, while outflow is a record of the expenditure
being made by the company. Managing this movement of funds in relation to the budget
is essential for a business.

At the corporate level, the main aim of the process of managing finances is to achieve
the various goals a company sets at a given point of time. Businesses also seek to
generate substantial amounts of profits, following a particular set of financial processes.

Financial managers aim to boost the levels of resources at their disposal. Besides, they
control the functioning on money put in by external investors. Providing investors with
sufficient amount of returns on their investments is one of the goals that every company
tries to achieve. Efficient financial management ensures that this becomes possible.

Strong financial management in the business arena requires managers to be able to:
 

 Interpret financial reports including income statements, Profits and Loss or P&L,
cash flow statements and balance sheet statements
 

 Improve the allocation of working capital within business operations

 

 Review and fine tune financial budgeting, and revenue and cost forecasting
 

 Look at the funding options for business expansion, including both long and short
term financing

 Review the financial health of the company or business unit using ratio analyses,
such as the gearing ratio,profit per employee and weighted cost of capital

 Understand the various techniques using in project and asset valuations

 Apply critical financial decision making techniques to assess whether to proceed

with an investmtn

 Understand valuations frameworks for businesses, portfolios and intangible

assets
Financial Management
Financial Management is the process of managing the financial resources, including accounting
and financial reporting, budgeting, collecting accounts receivable, risk management, and
insurance for a business.

The financial management system for a small business includes both how you are financing it as
well as how you manage the money in the business.

In setting up a financial management system your first decision is whether you will manage your
financial records yourself or whether you will have someone else do it for you. There are a
number of alternative ways you can handle this. You can manage everything yourself; hire an
employee who manages it for you; keep your records inhouse, but have an accountant prepare
specialized reporting such as tax returns; or have an external bookkeeping service that manages
financial transactions and an accountant that handles formal reporting functions. Some
accounting firms also handle bookkeeping functions. Software packages are also available for
handling bookkeeping and accounting.

Bookkeeping refers to the daily operation of an accounting system, recording routine

transactions within the appropriate accounts. An accounting system defines the process of
identifying, measuring, recording and communicating financial information about the business.
So, in a sense, the bookkeeping function is a subset of the accounting system. A bookkeeper
compiles the information that goes into the system. An accountant takes the data and analyzes it
in ways that give you useful information about your business. They can advise you on the
systems needed for your particular business and prepare accurate reports certified by their
credentials. While software packages are readily available to meet almost any accounting need,
having an accountant at least review your records can lend credibility to your business,
especially when dealing with lending institutions and government agencies.

Setting up an accounting system, collecting bills, paying employees, suppliers, and taxes
correctly and on time are all part of running a small business. And, unless accounting is your
small business, it is often the bane of the small business owner. Setting up a system that does
what you need with the minimum of maintenance can make running a small business not only
more pleasant, but it can save you from problems down the road.

The basis for every accounting system is a good Bookkeeping system. What is the difference
between that and an accounting system? Think of accounting as the big picture of how your
business runs -- income, expenses, assets, liabilities -- an organized system for keeping track of
how the money flows through your business, keeping track that it goes where it is supposed to
go. A good bookkeeping system keeps track of the nuts and bolts -- the actual transactions that
take place. The bookkeeping system provides the numbers for the accounting system. Both
accounting and bookkeeping can be contracted out to external firms if you are not comfortable
with managing them yourself.

Even if you outsource the accounting functions, however, you will need some type of
Recordkeeping Systems to manage the day-to-day operations of your business - in addition to a
financial plan and a budget to make certain you have thought through where you are headed in
your business finances. And, your accounting system should be producing Financial Statements.
Learning to read them is an important skill to acquire.

Another area that your financial management system needs to address is risk. Any good system
should minimize the risks in your business. Consider implementing some of these risk
management strategies in your business. Certainly, insurance needs to be considered not only for
your property, office, equipment, and employees, but also for loss of critical employees. Even in
businesses that have a well set up system, cash flow can be a problem. There are some tried and
true methods for Managing Cash Shortages that can help prevent cash flow problems and deal
with them if they come up. In the worst case you may have difficulties meeting all you debt
obligations. Take a look at Financial Difficulties to learn more about ways to manage situations
in which you have more debt than income.

It is possible you may even be at the a point where you want to sell the business or simply close
it and liquidate assets. There are financial issues involved for these circumstances too. So, be
certain that you know what steps you need to take in order to protect yourself financially in the
the long run.

Clearly, financial management encompasses a number of crucial areas of your business. Take
time to set them up right. It will make a significant difference in your stress levels and in the
bottom line for your business.

Table of Contents:

4 Top Small Business Credit Cards Getting Paid

Accepting Cash and Checks Insurance
Accounting Software How to Build Your Small Business Credit
Accounting Systems How to Manage Risk in Your Business
Asset Liquidation How to Protect Your Credit when Your
Benefits of Using a Business Credit Card . Small Business Is Struggling
Bookkeeping Systems Living Within Your Business Budget
Budgeting Systems Managing Cash Shortages
Capital Resources Monthly Accounting
Cash Management Paypal
Collecting Accounts Receivable Planning Capital Investments
Choosing a Bank Professional Help
Choosing a Small Business Credit Card Recordkeeping Systems
Closing a Business Risk Management Strategies
Financial Difficulties Selecting an Accountant
Financial Statements Selling on Credit
Financing a Small Business Tax Resources

 
Basic Principles of Financial management
Financial Management

Good financial planning cannot be underestimated. Many surveys have identified that around
74% of business closures were attributable to poor financial management. A good business will
have a business plan that incorporates financial budget for projected sales, expenses, net
profits, staff needs and capital acquisition (purchase of assets)

- The level of profitability in a business will have an impact on the liquidity of the business, and
this must be continuously monitored. The amount of cash in the business daily and the credit
available from bankers must be sufficient to allow the businesses to trade. The measure of
business’s efficiency is the manner, in which it maintains its records promptly, collects its
overdue receivables and maintains an inventory that turns over quickly.

- The ultimate measure of business success is the return on shareholder’s funds, often
expressed as net profit divided by shareholders funds.

- Actual results should be reported against budgets at least monthly. This enables management
to correct adverse trends . Corrections may include improved staff training, better cost control,
improved purchasing from suppliers, and better marketing through advertising, etc.

- The importance of cash in a business and the speed with which it flows through the business
accounts can be the difference between survival and failure. Cash is needed to pay bills. A
business id deemed to be insolvent when it is unable to pay its debts as and when they arise.
Bank lines of credit are very important to any business.

- The financial controls needed in s successful business are intended to minimise risk. Expense
control should be firm and production costs should avoid wastage without compromising quality.
Minimising risk is supplemented by insurance for fire, burglary, theft and loss of profits, etc.

- Many people enter business with little basic knowledge. Financial planning is about gaining
knowledge in preparation for a course of action for any enterprise. It is important to know about
financial reports such as budgets, cash flow, profit and loss statements and balance sheets.
Record systems are the means of being able to check progress against past results.

- The planning cycle begins with a business looking at its present financial position. Then the
managers prepare a business plan with objectives and budgets. Next are the implementation
and control phrases. Planning is strategic or operational.

- Major participants in the financial market are:

- Investment/merchant banks

- Commercial banks – provide customers with a range of products including deposit and cheque
accounts, credit/debit cards, personal loans and mortgages

- Money market dealers – buy and sell government securities on the secondary market, and
offer cash or deposit facilities to major organisations.
- Finance companies – major providers of business finance, factoring, leasing and property
financing

- Insurance/superannuation funds – involved in domestic and commercial mortgages, property

developments, bonds, shares and government securities.

- Building societies/credit unions- make advances to customers for housing and personal loans,
similar to banks.

- The reserve bank of Australia acts as banker for the government; implements monetary policy
independently but in conjunction with the government of the day; monitors commercial banks;
monitors foreign exchange rates; manages coin and note issues; and monitors economic
data.

- Merchant/investment banks are major players in the short-term money markets, dealing with
all money market instruments or securities such as commercial bills. They act as primary
advisors to corporations seeking to issue shares or debentures/bonds. They also underwrite
new share/debenture issues, and tender and deal in government securities.

- The Australian Stock Exchange Limited (ASX) has many customers, but the principle ones are
investors, listed companies and stockbrokers , who are intermediaries (links) between them and
the capital markets.

- Domestic market influences on our capital markets include where we are on the economic
cycle; economic management policies of the Federal Government ; interest rate changes by the
Reserve Bank; level of unemployment ; industrial stability; consumer demand; the level of
investment in the economy; the innovation rate; and the level of inflation.

- Overseas market influences are affected by the world economic position. These effects flow
into our capital markets. Interest rates, unemployment, government management, consumer
demand, industrial stability and regional conflicts all affect our markets.

- Like most countries, Australia can point to certain indicators of financial health eg. Changes in
inflation rates; the consumer price index; the rate of unemployment; the level of new investment;
the increase/decrease in our overseas debt; rate of imports; stock market index; value of
currency etc. All these indicators combine to identify trends in our financial markets.

- Internal funds are generated from monies furnished by the owners of the business. If a
business is successful financially, the owners may decide to leave some or all of the profits from
operations inside the business. These are known as retained profits. A large, old and well-
established business may have several hundred million dollars in retained profit. A new small
business may have little or no retained profits.

- When business owners decide to borrow , they must obtain the funds from external sources.
Short term funding refers to borrowing likely to be repaid within one year. Long term funding
refers to borrowing that will be repaid over a term as long as 10-20 years. Mortgages (loans
secured by real property or business assets) and debentures (loans from the general public) are
commonly used to meet long term funding needs. It is important not to confuse sources of funds
(eg banks) with types of finance (overdraft, mortgages).

- Factoring allows businesses to obtain external funds by selling their accounts receivable.
Factoring occurs when businesses allow credit in payment for merchandise. The factoring
company charges the business a small fee and the business has the advantage of receiving
an immediate credit in its bank account. As factoring has become a more common business
practice, businesses specialising in factoring have been established in Australia.

- Borrowers need to take care that they will be able to repay the borrowed funds during the life
of the intended business expenditure. For example, short term borrowing via on overdraft to
fund and expected 90-day cash shortage is considered acceptable business practice. However,
taking a long-term mortgage to fund the same expected 90-day cash shortage is generally not
considered sound management.

- Philosophies vary about the right combination of debt and equity finance. If the business is
unable to repay the debt, including principle, interest and associated charges, creditors may
take control of the business. Too much debt financing can mean that all stakeholders are at risk.

- Gearing refers to the percentage of funding that is borrowed against an asset or the total
assets of a business. The greater percentage of funding that is borrowed, the higher the gearing
ratio. In most cases, a business is unwise to owe more than it owns.

- Both balance sheets and revenue statements are normally prepared at the end of the financial
year. They are designed to answer two questions:

- Is the business profitable (from the revenue statement)

- What is the business’s financial position (from the balance sheet)

- The accounting equation (A=L+OE) , from the balance sheet is also expressed as (A–L=OE).
For example of the assets of a business are sold for $100 000 and the owners repay all
liabilities of $60 000, the remaining $40 000 is what the owner gets to keep – that is, the owners
equity

- Current ratios range from 0.6:1 to 3.0:1, depending on how easily inventories and accounts
receivable can be converted to cash, and how quickly cash flows in from a sale.

- The higher the debt to equity ratio, the higher the risk for creditors and owners. Solvency
(gearing) ratios, like liquidity ratios can vary widely, from debt free to over 300%. A gearing ratio
below 100% is usually considered safe or conservative.

- Generally the higher a businesses gross profit ratio, net profit ratio and return on owner’s
equity ratio , the better for the business. Profitability ratios are typically starting points for
evaluating businesses.

- Efficient managers work to lower expense ratios by monitoring and cutting costs wherever
possible. Conversely, they seek to raise accounts receivable turnover ratio by establishing
realistic credit policies and monitoring credit collections.

- Ratios allow analysts to compare a business with other similar businesses. Through ratios
analysts can also examine the operations of any business over time, or compare a business
with a benchmark .

- Both financial reporting and ratio analysis, however useful, have limitations. One business may
legally use a different accounting method of its competitors. Another business may value its
goodwill differently. The true value of assets may be understated on balance sheets because of
historical cost accounting . Analysts need to be wary.

- The term working capital refers to an actual dollar amount. Most businesses need more
current assets than current liabilities at all times. A key management responsibility is to ensure
the business always has enough working capital to pay for the continuing operating costs
incurred by the business.

- The relationship between current assets and current liabilities is often expressed as a ratio.

- A business’s current mix of payables, short-term loans and overdrafts is also largely
controllable. Businesses that do not control the mix of their current assets are likely to
experience liquidity problems – that is, they will not be able to pay current operating expenses.
This commonly occurs when managers allow accounts receivable to become overdue.

- A business’s current liability mix of payables, short-term loans and overdrafts is also largely
controllable, and is another important responsibility for managers. Normally, businesses that
allow their current liabilities to become greater than their current assets are asking for trouble
because creditors, such as telephone companies and suppliers, are likely to stop extending
credit when accounts are not paid on time.

- A common management trend is for businesses to manage or improve their dollar amounts
and their ratios of working capital by lessening assets or by selling assets and then leasing them
back. Factoring is the management strategy of selling accounts receivable, at a discount, to a
third party in order to convert accounts receivable to cash. Effective ways to improve the quality
of working capital are to improve the collection of receivables, install just-in-time inventory
controls, have sales of excess stock and install cost control programs.

- Regrettably many businesses do not recognise the importance of checking cash resource daily
. This is vital knowledge to enable creditors, wages, loans and other expenses to be paid. Cash
will be tied up in receivables, inventories, or in other investments the business has made. The
bank overdraft , usually secured, is intended to be a fluctuating account according to the needs
of the business.

- Cash flow statements are presented to management monthly. They show the opening cash
flow balance from last month, the total cash received from all sources, receivables , cash sales,
proceeds for asset sales, loans received etc and the total payments made out, such as
expenses , new inventory and loan repayments. The balance at the end of the month should be
within capability of the business bank overdraft. A good cash flow statement should also show
the value of receivables, inventory and ideally the sales last month to give a trend.

- Businesses may sell goods for cash or on credit . Management should have policies for
checking customer creditworthiness and effective methods of collecting accounts. Customers
who do not pay on time will tie up the cash in a business and can jeopardise the success of a
business

- Suppliers who value large orders often may offer a discount for bulk purchase or for earlier
payment. Discounts can be very effective in lowering the costs of a business, provided the
business can manage its cash well. Management can also buy goods on extended terms
whereby a supplier has agreed to allow the purchaser to pay over a set period by certain
instalments at fixed times.
- Management should have other strategies to ensure the available cash in their business is
effectively used. They may sell off idle assets, watch for wastage, and consider factoring and
leasing.

- Large companies have found that special cost centres enable different managers to overview
how costs are progressing against budget. Production, marketing, administration, research and
development may be cost centres. A small business usually has one cost centre. All businesses
need to minimise expenses and ensure a senior person is controlling expenses. Costs are
made up of two types.

- Fixed costs – such as monthly rent, insurance and leasing charges that do not vary with
volume or sales

- Variable costs – vary with the volume of business

- Revenues may be controlled by varying the sales mix and the target markets. As effective
pricing policy meets or beats competition, seeks a greater market share and sells surplus
stocks.

- Unconscionable conduct usually falls into two major categories; those practices that are
illegal , either deliberately or through ignorance, and those practices that may be unethical ,
through the use of unacceptable actions, generally dictated by the society in which we live.

- Ethics is a set of principles by which our actions are judged by others. It is about how we make
decisions to do the right thing and involves honesty, fairness, caring and courage to make the
right decision. Businesses can sometimes have dilemmas in deciding between the interests of
shareholders , staff, customers, the environment and the wider community.

- Public companies come under more scrutiny as they involve the investment of other people’s
money. All public companies must have recognised accounting firm appointed as auditors, who
must complete a full investigation of the accounting records each year. The audit report to
shareholders is included in each annual report.

- All businesses must follow certain reporting conventions. The Australian accounting profession
has laid down minimum standards that must be followed in reporting financial results. The audit
report gives a true and fair view of the company’s financial position

- The corporations Law sets out the minimum criteria all companies must meet. Directors may
be personally liable for breaches, and heavy penalties can be imposed. Proprietary/private
companies must also meet these standards. Certain types of illegal conduct include, bribery,
misuse of funds in the business, directors acting against the interest of the company, failure to
declare conflicts of interest and continuing to trade while insolvent.

- The Australian Securities and Investment Commission is empowered to administer the

Corporation Law and to ensure that all businesses meet their statutory obligations. Such
statutory obligations include the duty to act with reasonable care and diligence, to ensure the
correct payment of taxes, to act honestly in the exercise of their powers, and to report changes
of address or company directors.

- Unethical behaviour is unacceptable conduct. Excuses are often used and rejected as
reasons. Certain types of conduct such as asset stripping, giving gifts for favours, illegally
obtaining information through others, disposing of waste in the wrong manner and taking
advantage of staff, are all unethical and in certain circumstances may be illegal.
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Basic Guide to Financial

Management in For-Profits
© Copyright Carter McNamara, MBA, PhD, Authenticity Consulting, LLC.
Applies to for-profits unless otherwise noted.

New business leaders and managers have to develop at least basic skills in
financial management. Expecting others in the organization to manage
finances is clearly asking for trouble. Basic skills in financial management
start in the critical areas of cash management and bookkeeping, which
should be done according to certain financial controls to ensure integrity in
the bookkeeping process. New leaders and managers should soon go on to
learn how to generate financial statements (from bookkeeping journals) and
analyze those statements to really understand the financial condition of the
business. Financial analysis shows the "reality" of the situation of a business
-- seen as such, financial management is one of the most important
practices in management. This topic will help you understand basic practices
in financial management, and build the basic systems and practices needed
in a healthy business.

Sections in This Topic Include:

Basics and Getting Started

Basics of Financial Management

- - - Role of Treasurer (for example, if your's is a corporation)
- - - Getting an Accountant or Bookkeeper, If Needed
- - - Buy Accounting Software to Help You?
- - - Getting a Banker
- - - Basic Overview of For-Profit Financial Management
 Activities in the Yearly Accounting Cycle
Bookkeeping:
Bookkeeping Basics
Financial Controls

Critical Operating Activities in Financial Management:

Managing a Budget
Managing Cash Flow (including managing your bank account)
Credit and Collections
Budget Deviation Analysis

Financial Statements and Analysis:

Financial Statements
- - - Profit and Loss Statement (Income Statement)
- - - Balance Sheet
Financial Analysis
- - - Profit Analysis
- - - Break-Even Analysis
- - - Ratios

Special Topics
Financing Major Purchases
Cost Cutting

General Resources
Various Types of Resources

BASICS AND GETTING STARTED

Basics of Financial Management

Your Most Useful Resource: A Board Treasurer (if Your's is a Corporation)

If your small business is a corporation, you would do well to find someone
experienced in financial management and encourage them to be your board
treasurer (your board chair has this responsibility to find someone suitable, as
well). Therefore, it's important to understand the role of the board treasurer.
Role of Treasurer (for club, board, etc.)
 Getting an Accountant or Bookkeeper, If Needed
If you are inexperienced in financial management, then you should get an
accountant initially to help you set up your bookkeeping system, generate financial
statements and do some basic financial analysis. But don't count on an accountant
to completely take over your responsibility for financial management! The
accountant can help you set up a bookkeeping system, generate financial
statements and analyze them, but you have to understand financial data to the
extent that you can understand the effects of your management decisions, the
current condition of your business and how decisions will effect the financial
condition of your business in the future.
Getting and Using Accounting Services

You should carefully consider whether you should hire an outside

accountant, or hire your own employee. The IRS pays increasing attention to
the hiring of independent contractors.
Potential Issues in Hiring Consultants (general information and IRS-related
issues)

The following link might help you when you establish a contract with an
accountant.
Business Contracts (this will be useful if you sign any contracts with the
accountant)

Buy a Software Package to Automate Your Financial Management?

Strongly consider getting a software package to manage your books! There are a
number of very useful software packages that will help you automate bookkeeping,
generation of financial statement and their analysis. Note that an accounting
software package can greatly reduce the time to enter and manage accounting
transactions, and generate financial statements. However, you still should have at
least a basic understanding of the accounting process for your organization,
including what journals are used and what general accounts exist. You must have
good understanding of financial statements and how to analyze them -- an
accounting package cannot do this for you!
Accounting Software (this link is to "Software for Small Computer Systems")

Getting a Bank and Banker

You'll need to start a business account at a bank. Probably the best way to find a
good bank is to ask for advice and references from other small businesses,
especially those that are of the size and nature of yours. If you're just starting out,
you probably don't have much money. You may be able to get buy with a non-
interest-bearing checking out that has no, or minimal, fees. The following links may
 be useful
Getting and Using a Banker

No Matter Who Does Your Finances, YOU Should Know Basic Principles of
Accounting and Finances
To get an overall sense for the recurring financial activities in the typical, read the
following articles. (You'll soon get more basic information below in the section titled
"Bookkeeping Basics".)
Basics of Financial Management in U.S. Small For-Profit Businesses
Financial Management Training Center
Basic Accounting Lesson Plans and Worksheets

Other sites that you might benefit from are:

Barton's Bookkeeping Tutorial
All Bookkeeping resources
Online Learning Center's tutorial
Financial Accounting for Owners, Managers, and Administrators
Free Introductory Accounting & Bookkeeping Tutorial
Financial Management Training Center

ACTIVITIES IN YEARLY ACCOUNTING CYCLE: Bookkeeping and Controls

Bookkeeping Basics
Basics financial managements starts with good record keeping. Be sure that you've
read the above-mentioned article Basics of Financial Management in U.S. Small For-
Profit Businesses7 before you continue reading the links listed below.

If You Want to Learn All About Bookkeeping and Accounting, Start Here
These sites provide an online tutorial about the basics of bookkeeping and
accounting. Don't worry about thoroughly understanding very term and process.
But do think about what you're reading in order to get a strong "feel" about the
process of accounting.
Understanding Financial Statements (basic tutorial about accounting and finances)
Bookkeeping and Accounting: From Start to Finish
Bookkeeping and Accounting Basics
Introduction to Bookkeeping
 Classification of Accounts (for Chart of Accounts)
In accounting, different types of financial transactions (eg, paying telephone bills,
copier bills, getting money from sales, getting money from interest income, etc.)
are assigned specific numbers (account numbers) which help to record and track
those types of transactions. Businesses might create their own list (or chart) of
accounts or adopt a chart used by other organizations. In any case, you should
have some basic impression of a chart of accounts. The following links will help you.

Setting Up a Chart of Accounts

What Should a Chart of Accounts Include?
Chart of Accounts Definitions

Financial Controls
Financial controls exist to help ensure that financial transactions are recorded and
maintained accurately, and that personnel don't unintentionally (or intentionally)
corrupt the financial management system. Controls range from very basic (eg,
using a checkbook and cash register tapes to more complex, eg, yearly financial
audits).
Internal Financial Controls for a Small Business
another set of controls
Financial Control (Cashflow, Taxation, Classic Pitfalls)

The following link is to a variety of links about controls to prevent intentional

subversion of the financial management system.
Protecting Against Theft, Fraud, Forgery, etc.

CRITICAL OPERATING ACTIVITIES IN YEARLY ACCOUNTING CYCLE:

Now that you have a basic sense of the overall accounting and financial
management process, we'll look at the key parts at the beginning of the
overall process, including budgeting, managing cash and credit.

Budget Management
A budget depicts what you expect to spend (expenses) and earn (revenue) over a
time period. Amounts are categorized according to the type of business activities,
or accounts (for example, telephone costs, sales of catalogs, etc.). Budgets are
useful for planning your finances and then tracking if you're operating according to
plan. They are also useful for projecting how much money you'll need for a major
initiative, for example, buying a facility, hiring a new employee, etc. There are
yearly (operating) budgets, project budgets, cash budgets, etc. The overall format
of a budget is a record of planned income and planned expenses for a fixed period
of time.
Budgeting in a Small Business
Budget Management and Monitoring
What Type of Capital Does Your Business Need?

Managing Cash Flow

As a new business, your biggest challenge is likely to be managing your cash flow --
probably the most important financial statement for a new business is the cash flow
statement. The overall purpose of managing your cash flow is to make sure that
you have enough cash to pay current bills. Businesses can manage cash flow by
examining a cash flow statement and cash flow projection. Basically, the cash flow
statement includes total cash received minus total cash spent. Cash management
looks primarily at actual cash transactions.
(Thanks to the Women's Business Center for a very useful set of links!)

Basics of Cash Management

The Importance of Cash Management
Techniques for better cash flow management
Basic Cash Management Techniques
Techniques for Improving Cash Flow
Seven Secrets To Forecasting A Rock Solid Cash Flow

Preparing a Cash Flow Statement

Develop a Cash Flow Statement
Preparing Your Cash Flow Statement
Cash Flow Worksheet cash flow worksheet

Preparing Cash Flow Projections and Forecasts

More information on doing cash flow forecast

Annual Cash Flow Projections

Short-Term Cash Flow Projections

Managing Your Checking Account

For a new business, your check register very likely will be your primary means to
record and track cash. Whether yours is a new business or an established business,
you'll need to know how to manage your bank account. See
Reconciling Your Bank Account
Checking Account Lessons
Managing Your Checking Account
 Setting Up and Managing Your Bank Account
You will need to set up a business bank account, which will include a business
checking account. Banks often classify and handle business bank accounts
differently than private or personal bank accounts. The following links will help you
set up your account. Be sure to also see Getting a Banker.

Credit and Collections

One of your biggest challenges in managing cash flow may be decisions about
granting credit to customers or clients, and how to collect payment from them.
Debt Collection-Know Your Rights
Debt Collection Basics
Credit Granting Authority
Be Active In Managing Your Accounts Receivables

Budget Deviation Analysis

You learned above that a budget depicts what you expect to spend (expenses) and
earn (revenue) over a time period. Budget deviation analysis regularly compares
what you expected, or planned, to earn and spend with what you actually spent and
earned. The budget deviation analysis can help greatly when detecting how well
you're tracking your plans, how much to accurately budget in the future, where
there may be upcoming problems in spending, etc. A budget deviation analysis
report might include columns with titles:

Difference % Deviation
Planned for Month Actual for Month
(planned minus actual) (Difference x 100)

ACTIVITIES IN YEARLY ACCOUNTING CYCLE: Financial Statements and

Analysis

Financial Statements
To really understand the current and future conditions of your business, you have
to look at certain financial statements. These statements are generated by
organizing and analyzing numbers from your accounting activities. You should
understand the two primary financial statements, the Profit and Loss Statement (or
Income Statement) and the Balance Sheet. (Some sources believe that there are
other primary statements, too, such as the cash flow statement or change in
capital, etc. However, the Income Statement and Balance Sheet are the two
standard statements for any business.) The following links will give you an overview
of these two key statements, and we'll soon get into them in more detail later on
below. Here are several perspectives on the statements.
Introduction to Using Financial Statements
 Using Financial Statements
Basic Guide to Understanding Financial Statements
Introduction to Understanding Financial Statements
Understanding Financial Statements
Financial Accounting and Financial Statements

Financial Planning and Analysis -- Profit and Loss (Income) Statements

These "P and L" statements depict the status of your overall profits. These
statements include much money you've earned (your revenue) and subtract how
much you've spent (your expenses), resulting in how much you've made money
(your profits) or lost money (your deficits). Basically, the statement includes total
sales minus total expenses. It presents the nature of your overall profit and loss
over a period of time. Therefore, the Income Statement gives you a sense for how
well the business is operating.
Understanding Income Statements
Income Statement Analysis
Income Statement Analysis
The Income Statement

Financial Planning and Analysis -- Balance Sheets

Whereas the P and L statement depicts the overall status of your profits (or deficits)
by looking at income and expenses over a period of time, the balance sheet depicts
the overall status of your finances at a fixed point in time. It totals your all your
assets and subtracts all your liabilities to compute your overall net worth (or net
loss). This statement are referenced particularly when buying or selling a business,
or applying for funding. Here are several perspectives.
Basics About Balance Sheets
Understanding Balance Sheets
Balance Sheet Analysis

Financial Analysis
Financial analysis can tell you a lot about how your business is doing. Without this
analysis, you may end up staring at a bunch of numbers on budgets, cash flow
projections and profit and loss statements. You should set aside at least a a few
hours every month to do financial analysis. Analysis includes cash flow analysis and
budget deviation analysis mentioned above. Analysis also includes balance sheet
analysis and income statement analysis. There are some techniques and tools to
help in financial analysis, for example, profit analysis, break-even analysis and
ratios analysis that can substantially help to simplify and streamline financial
analysis. How you carry out the analysis depends on the nature and needs of you
and your business. The following links will help you get a sense for the "territory" of
financial analysis.
 Financial Planning and Analysis -- Profit Analysis
There are a variety of ways to help determine profitability of your business.
Cost/Volume/Profit Analysis
Calculating Profitability Ratios (scroll down)
Cost-Volume-Profit Analysis

Financial Planning and Analysis -- Break-Even Analysis

The break-even analysis uses information from the income statement and cash flow
statements to compute how much sales much be accomplished in order to pay for
all of your fixed and variable expenses. Fixed expenses are expenses that you'd
have regardless of the level of sales of products or services (eg, sales, rent,
insurance, maintenance, etc.). Variable expenses are incurred according to the level
of sales of products or services (eg, sales commissions, sales tax, freight to ship
products, etc.). Break-even analysis can help you when projecting when you'll
make a profit, deciding how much to charge for a product, setting a sales goal, etc.
Break-Even Analysis
Break-Even Analysis
Break-Even Analysis and Forecasting
Break-even Point

Financial Planning and Analysis -- Ratios

There are a variety of ratios that can be used to help determine the current and
future condition of a business. The following links provide explanation and
procedures for using those ratios. The ratios are produced from numbers on the
financial statements. Note that the usefulness of ratios often are from comparing
ratios from different time periods in the same business or from industry standards
for a type of business, eg, manufacturing, wholesale, service, etc.
Overview of major types of ratios and how they're computed
Financial Ratio Analysis (Definition)
Financial Ratios (different types)

SPECIAL TOPICS

Financing Major Purchases

Cost of Lease vs. Purchase

Leasing Office Space
How to Save for a Major Purchase
 Cost Cutting

Business Cost-Cutting Ideas

7 Easy Cost Cutting Measures
Cost-cutting ideas for Small Businesses
Cost Cutting Ideas for Businesses
Commentary: Cost-saving measures for businesses short of layoffs
How Companies are Cutting Costs
Temporary Cost Cutting Measures Violate the Wage and Hour Laws
Practically Painless Business Cost-Cutting Strategies
Recession Cost-Cutting No-Nos

GENERAL RESOURCES

Various Types of Resources

Sources of Online Assistance and Information

Resources for For-Profits

Getting and Using Accounting Services

Choosing and Using an Accountant
Ways in Which an Accountant Can Help
Choosing Professionals to Help You
Keeping Accounting Costs Down

Getting and Using Banking Services

Choosing Professionals to Help You
Setting up Your Bank Accounts
Closing a Bank Account Without Going to the Bank

Have a Treasurer to Help You?

Role of Board Treasurer (if your's is a corporation)
Being a Club Treasurer (pertains to club treasurer, but presents many
possible tasks)
Treasurer Responsibilities (to help you determine if you need one)

Accounting Software
Software for Small Businesses

Business Calculators
Business Calculator - break even analysis
 Also consider
Getting and Using a Lawyer in the U.S.
Understanding and Forecasting the Credit Cycle—Why the Mainstream
Paradigm in Economics and Finance Collapsed